Form 4797Chapter 3 pp. 85 -118

2018 Agricultural Tax Issues

Form 4797Page 85

Reporting of gains and losses on the disposition of business property. The collection point for gains and losses

reported elsewhere.

Overview of Key Terms Page 85

Boot Deferred Gain I.R.C. § 1231 Property I.R.C. § 1245 Property I.R.C. § 1250 Property Listed Property

Realized Gain Recognized Gain Relinquished Property Replacement Property

I.R.C. § 1231 Property Page 86

Net gain taxed as capital gain Net loss as ordinary loss List of 8 itemsGenerally, sales & exchanges of

business property Includes livestock if held for dairy,

breeding, sport or draft

Holding Periods andReporting Page 87

Cross-Reference between Forms 4797 and Form 4684, Section B (See Chapter 4) I.R.C. § 1231 requires a holding period for

business assetsGenerally held for more than one year 24 months for cattle and horses 12 months for other livestock

G/L reported on Form 4797, Part 1 Example 3.1

Example 3.1 Form 4797 reporting

Form 4797, Part II

Part II is the collection point for transaction which do not qualify under I.R.C. §1231.Ordinary Income and losses Example 3.2

Sale of Joseph’s land before 11-15-18.Practitioner Note: De Minimis Election

Other I.R.C. § 1231 Issues to considerPage 89

Excluded Property List of 4 items – inventory, self-created capital

assets Excluded Gain I.R.C.§ 1239 Sale of property to related party who can

depreciate it Know your relatives – only 3 in this casePractitioner Note: I.R.C.§ 197 Intangibles

Nonrecaptured I.R.C. § 1231 LossesPage 90

Losses and gains in the same year are netted on Form 4797. Any net I.R.C. § 1231 gain in any of 5 years following

a net I.R.C. § 1231 loss is treated as ordinary income to the extent of any of that prior

nonrecaptured I.R.C. § 1231 loss.

Example 3.3 Recapture of I.R.C. § 1231 Losses Page 90

Year Gain Loss Capital

Gain Ordinary Income

Ordinary Loss

Nonrecaptured § 1231 Loss Carryover

2012 $16,000 -- $16,000 -- -- -- 2013 $ 7,000 -- $ 7,000 -- -- -- 2014 -- $15,000 -- -- $15,000 $15,000 2015 $ 5,000 -- -- $ 5,000 -- $10,000 2016 $ 4,000 -- -- $ 4,000 -- $ 6,000 2017 $ 2,000 -- -- $ 2,000 -- $ 4,000 2018 $ 6,000 -- $ 2,000 $ 4,000 -- $0

Example 3.3 Form 4797

Planning Pointersp. 92

If possible, generate § 1231 gains first, then losses in subsequent tax year If § 1231 gains, are infrequent, accelerate

any loss to start the 5-year recapture period

Depreciation Recapture Page 92

This section focuses on I.R.C. § 1245 or 1250 property dispositions at a gain § 1245 - All gain is taxed as ordinary income up

to the total allowed or allowable depreciation § 1250 - All gain is taxed as ordinary income up

to the excess of depreciation in excess of S/L Similar ordinary income may arise due to

I.R.C. §§ 1252, 1254, and 1255

Form 4797, Part III

Part III is the initial entry for those transaction which are subject to recapture rules. Held the required holding period Sold at a gain

Each property disposed of has a unique column for reporting the

transaction. and a unique row depending on recapture

rule

I.R.C. § 1245 Depreciation RecapturePage 93

Ordinary income to the extent that the lower of1. Recomputed basis, or2. Amount realizedExceeds adjusted tax basis

Or, gain is ordinary to the extent of depreciation (and other deducts – see list of 18)

I.R.C. § 1245 Depreciation RecapturePage 93

Definition of I.R.C. § 1245 Property List of applicable property depreciable personal property, SP

livestock/hort. bldgs, grain bins, silos, etc.

I.R.C. § 1245 Depreciation RecapturePage 93

Recomputed Basis Recomputed Basis is adjusted basis plus

the adjustments made for depreciation, amortization and other deductionsGenerally, original cost

Example 3.4 Recapture

Page 94

Sandy Pitt purchased a $120,000 loader in 2016 Elected out of Bonus Chose $10,000 for I.R.C § 179 Remaining $110,000 MACRS, 5 year Sold in 2018 for $65,000

Realized Gain CalculationSelling price $65,000Cost $120,000I.R.C. § 179 election (10,000)Depreciable amount $110,000Depreciation 2016

$110,000 × 20.0% =$ 22,000

2017 $110,000 × 32.0% = 35,200

2018$110,000 × 19.2% × ½ =

10,560

Accumulated depreciation

(67,760)

Adjusted basis (42,240)Realized I.R.C. § 1245 gain

$22,760

Form 4797 Reporting of $22,760 Gain

I.R.C.§ 1250 Depreciation RecapturePage 95

Similar Rules as previously discussed, applies to depreciable real property However, single-purpose ag and hort structures,

etc are I.R.C § 1245 property by definition Gain in excess of straight-line depreciation is

taxed as ordinary. The gain equivalent to straight-line is

“unrecaptured I.R.C.§ 1250 gain” and is taxed at a maximum of 25% (could be less).

Example 3.5 Sale of MACRS Farm Building Page 96

Red bought a farm building 7/1/2008 $100,000 basis to the building $20,000 basis to the landMACRS, 150% DB, 20-year property SOLD for $138,000 7/2/2018

Depreciation Recapture Calculation

Year150% DB 20-Year

MACRS Rate

MACRS Depreciation

Amount

SL Depreciation Amount

2008 3.750% $ 3,750 $ 2,5002009 7.219% 7,219 5,0002010 6.677% 6,677 5,0002011 6.177% 6,177 5,0002012 5.713% 5,713 5,0002013 5.285% 5,285 5,0002014 4.888% 4,888 5,0002015 4.522% 4,522 5,0002016 4.462% 4,462 5,0002017 4.461% 4,461 5,0002018 4.462% × ½ 2,231 2,500

Total depreciation $ 55,385 $ 50,000

Realized Gain CalculationSelling price of the building $110,000Adjusted basis of the building ($100,000 – $55,385) (44,615)Realized gain on the sale of the building $ 65,385

Selling price of the land $28,000Adjusted basis of the land (20,000)Realized gain on the sale of the land 8,000Total realized gain on sale $73,385

I.R.C. § 1250 recapture as ordinary income $ 5,385

Unrecaptured I.R.C. § 1250 gain (maximum 25% rate)

50,000

I.R.C. § 1231 gain (maximum 20% rate) 10,000Total realized gain on the sale of the building $ 65,385

I.R.C. § 1231 gain (maximum 20% rate) $ 8,000Total realized gain on the sale of the land $ 8,000

Page 1, 4797 Reporting of the Sale

Page 2, 4797 Reporting of Sale

Like-kind Exchanges Page 99

Recapture Rules: apply if there is an exchange of property

that is not subject to the same recapture rules. cause recapture income to be recognized

at the time of the exchange.

Additional Information Page 100

Observation Real property with different recapture rules

Practitioner Note Involuntary Conversion

Law Change TCJA removed personal property from the

like-kind exchange rules.

Property Subject to the Same Recapture Rules Page 100

Example 3.6 Exchange of I.R.C.§ 1245 prop. Able Skeever traded land, each parcel had

a bunk silo which was I.R.C.§ 1245 property See Example fact pattern for details

Realized and Recognized Gains Fig. 3.9FMV of silo #2 $ 85,000

Cash received 5,000Amount realized $ 90,000

Cost of silo #1 $ 100,000

Depreciation 2016 $100,000 × 10.71% = $ 10,7102017 $100,000 × 19.13% = 19,1302018 $100,000 × 15.03% × ½ = 7,515

Accumulated depreciation ( 37,355)

Adjusted basis of silo #1 ( 62,645)

Realized I.R.C. § 1245 gain on exchange $ 27,355

Gain recognized (boot) ( 5,000)

Deferred I.R.C. § 1245 recapture

$ 22,355

Form 8824 for Example 3.6 Fig. 3.10

Form 8824 for Example 3.6 Fig. 3.10

Form 8824 for Example 3.6 Fig. 3.11

Recognized Gain Calculation of Silo #2Sale price of silo #2 $ 90,000Basis of silo #2 $ 62,645Depreciation* 2018 $100,000 × 15.03% × ½ = 7,515

2019 $100,000 × 12.25% = 12,2502020 $100,000 × 12.25% × ½ = 6,125

Accumulated depreciation

(25,890)

Adjusted basis of silo #2 ( 36,755)

Gain realized and recognized $ 53,245Depreciation on silo #2 – I.R.C. § 1245 ordinary income

( 25,890)

Deferred recapture on silo #1 – I.R.C. § 1245 ordinary income

( 22,355)

I.R.C. § 1231 gain $ 5,000

Property Not Subject to Same Recapture Rules Page 104

Most buildings are I.R.C. § 1250 property However, sometimes gain is realized See list of non-§1250 real property Example 3.7 I.R.C. § 1245 Real Property

Facts illustrate building differences due to choices made relative to office bldg.

Summary of Like-Kind Exchange

Allocation of Relinquished Property to Acquired Property Fig. 3.14

Property Relinquished

Property Acquired

I.R.C. § 1231 I.R.C. § 1250

$100,000 of I.R.C. § 1231 property $75,000 $25,000

$400,000 of I.R.C. § 1245 property 400,000

$50,000 cash 50,000

Total $75,000 $475,000

Basis in Acquired Property

See Observation: Exchanges of single purpose livestock structures for other type buildings.

Installment Sales Page 107

The installment sale method applies to gains from nondealer sales of property where at least one payment is received in the tax year after the year of sale. Taxpayers must meet four criteria to

qualify. Easy to elect out (Practitioner Note)

Installment Sales Page 107

Taxable Gain Calculation Use IRS Form 6252Must report depreciation recapture in

year of saleOtherwise, gain or ordinary or capital

depending on type of asset and holding period Contract must charge adequate interest

Example 3.8 Seller financing Page 108

Machinery Sale on installment Sold machinery line for $320,000

• $100,000 down• $44,000 annually for 5 years• Plus interest

Orig. cost: $290K, $200K Adj. basis

Gross Profit % with Depreciation Recapture Addback

Page 108Selling price $ 320,000Adjusted basis ( 200,000)Gain $ 120,000

Selling price $ 320,000Adjusted basis $ 200,000Depreciation recapture 90,000Adjusted basis for gross profit calculation

( 290,000)

Gross profit $ 30,000

Gross profit $ 30,000Selling price ÷ 320,000Gross profit percentage 9.375%

Form 4797 Reporting Page 111

Form 4797 Reporting Page 110

Form 4797 Reporting Page 111

Form 6252 Result

Form 4797 Reporting Page 110

I.R.C. § 179 Recapture Page 113

If use drops below 50% for business, taxpayer must recapture the excess depreciation as compared to MACRS without using the expense election. Example 3.11 Winnie has 40% business use, $5,058

recapture as ordinary and SE tax too.

I.R.C. §179 Recapture Calculation

I.R.C. § 280 Listed Property RecapturePage 115

If listed business property use drops below 50%, then ADS straight-line depreciation is the depreciation allowable. Recapture of excess depreciation is

required from prior years.

Example 3.12 Depreciation Recapture under I.R.C. § 280F

Rita bought a car for $34,000 in 2016. Business use was 70%, basis $23,800 $10,000 expensed under §179

In 2018 use drops to 20% for business. Recapture of §179 amount and MACRS

depreciation

I.R.C. § 280F Recapture CalculationDepreciable Basis ×

MACRS RateDepreciation

AmountTotal

DepreciationActual depreciation:

I.R.C. § 179 $ 10,000

2016 MACRS $13,800 × 20.0% = 2,760

2017 MACRS $13,800 × 32.0% = 4,416

Total actual depreciation $ 17,176Allowable depreciation:

2016 ADS/SL $23,800 × 10.0% = $ 2,380

2017 ADS/SL $23,800 × 20.0% = 4,760

Total allowable depreciation ( 7,140)

I.R.C. § 280F recapture amount $ 10,036

Form 4797 Reporting

Questions?

Form 4797�Chapter 3 pp. 85 -118Form 4797� Page 85Overview of Key Terms Page 85I.R.C. § 1231 Property Page 86�Holding Periods and�Reporting Page 87Example 3.1 Form 4797 reportingForm 4797, Part IIOther I.R.C. § 1231 Issues to considerPage 89Nonrecaptured I.R.C. § 1231 Losses Page 90Example 3.3 Recapture of I.R.C. § 1231 LossesPage 90Example 3.3 Form 4797Planning Pointers�p. 92Depreciation RecapturePage 92Form 4797, Part IIII.R.C. § 1245 Depreciation RecapturePage 93I.R.C. § 1245 Depreciation RecapturePage 93I.R.C. § 1245 Depreciation RecapturePage 93Example 3.4 RecapturePage 94Realized Gain CalculationForm 4797 Reporting of $22,760 GainI.R.C.§ 1250 Depreciation Recapture�Page 95Example 3.5 Sale of MACRS Farm Building Page 96Depreciation Recapture CalculationRealized Gain CalculationPage 1, 4797 Reporting of the SalePage 2, 4797 Reporting of SaleLike-kind Exchanges Page 99Additional Information Page 100Property Subject to the �Same Recapture RulesPage 100Realized and Recognized Gains Fig. 3.9Form 8824 for Example 3.6Fig. 3.10Form 8824 for Example 3.6Fig. 3.10Form 8824 for Example 3.6Fig. 3.11Recognized Gain Calculation of Silo #2Property Not Subject to Same �Recapture RulesPage 104Summary of Like-Kind ExchangeAllocation of Relinquished Property to Acquired PropertyFig. 3.14Basis in Acquired PropertyInstallment SalesPage 107Installment SalesPage 107Example 3.8 Seller financing Page 108Gross Profit % with Depreciation Recapture Addback Page 108Form 4797 Reporting Page 111Form 4797 Reporting Page 110Form 4797 Reporting Page 111Form 6252 ResultForm 4797 Reporting Page 110I.R.C. § 179 Recapture Page 113 I.R.C. §179 Recapture CalculationI.R.C. § 280 Listed Property Recapture Page 115Example 3.12 Depreciation Recapture under I.R.C. § 280FI.R.C. § 280F Recapture CalculationForm 4797 ReportingQuestions?